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Archive for the tag “China”

2013 is set to be a crucial year for a lot of countries, with Obama starting a tough second term at loggerheads with the Republicans over the Fiscal cliff, Europe implementing a set of reforms that could spark the end of the Euro crisis and China’s new leaders hinting at political reform in a economy that could overtake America in a few years. But some more important long term trends are also starting to take effect, which could change how the world economy works.

Hu Jintao’s new reign as the leader of China has sparked talk of political reform.

One sector where big change is taking place is in manufacturing, where the location and tools are set to transform. For the latter the trend over the last decade has been for manufacturing jobs in the West to be outsourced to China. The Chinese labour force were willing to work for a fraction of their Western counterparts salaries, boasted colossal human capital and had a very underrated infrastructure that allowed for such goods to be transported quickly and efficiently. This helped fuel China’s lightning growth which has seen it transform from a developing country to a developed country in record time. But this has also seen a middle class emerge in China that has new demands. More emphasis now needs to be placed on the service sector for the economy to keep expanding at the same pace, as China’s grip on manufacturing is no longer as tight as it once was. Wages in the sector have been rising in the country, at around 20% a year, while China’s currency that had for so long been artificially kept weak, has been allowed to appreciate in the last few years. It now faces competition from its regional neighbours, as Vietnam and Bangladesh boast low cost workers waiting to be exploited by firms. But these countries don’t possess the same supply lines and pure number of workers as China, making them less serious rivals. Instead China’s biggest rival now lies below its biggest customer. Mexico is an attractive option for firms with its competitive costs (lower than China’s), large supply of workers and close proximity to America. The nation has come a long way, improving its infrastructure and enforcing its laws to a much higher degree than it did a decade ago. Of the $19.4 billion it gained in foreign direct investment in 2011, around half was gained in the manufacturing sector, while it has become the second largest supplier of electronic goods to the USA. HSBC even predicts that Mexico will overtake China and Canada as the biggest exporters to the USA by 2018. So next time you buy a product, you might not be surprised to see it originated in El Mexico.

Mexico’s PMI – which measures manufacturing output e.g anything over 50 is an increase and anything under is a decrease – has increased impressively over the last year.

The second big change to the manufacturing sector which could kick off this year is the much heralded 3D printing. The ability to replicate products without fault could dramatically change the manufacturing sector just like robotic machinery once did. It could displace a lot of workers, as the need for humans to graft products would no longer be needed. Instead there would only be a need for employees who could operate the 3D printers, reducing the labour force considerably. That would have the knock on effect of reducing the need for out-sourcing (already on the wane) as the cost of manufacturing products would no longer depend on the wages of the local population. Instead it would make far more sense for 3D printing factories to be established in the home markets of the Western world, so that goods could be delivered fast and have access to modern technology far easier. The “ink” needed could also be very cheap for some products, as old products could be recycled to create the base materials for the 3D printed objects. While printing unique products for different customers would be rather easy, allowing for more artistic licence without the usual added costs. Alas, 3D printing is not yet ready for mass production, while some products would indeed remain cheaper to make from scratch rather than printing copied versions. But this could be the year it kicks off, as most of the ingredients are ready for factories to start trialing 3D printing in producing goods. 2013 might be the year where replicating products was proved to be viable and yet another nail in the coffin for the 20th century manufacturing techniques.

The final economic trend for 2013 will be the battle between austerity and stimulus that has been building up since the financial crisis. Stimulus packages were the order of the day initially after the crisis to help economies lift themselves out of recession. But austerity then took over as governments looked to try and gain control over their inflated debts and deficits. Nowhere more than Europe has austerity been so devoutly defended, with Germany and the EU enforcing tough austerity measures upon the countries that received bailouts. This has had mixed success though, with Greece clearly in need of controlling its debts, but the likes of Spain actually rather in control of its finances until it started to implement poorly thought out austerity measures. At the end of the year, one of bailed out nations, Ireland will return to the bonds markets, after managing to return to a current account surplus and get its economy growing in 2011 and 2012. Ireland remain the model case for Austerity in Europe; after requiring a bailout in 2010, they have implemented tough austerity measures and repaired their economy (despite a still high budget deficit), so a return to the bond market would help prove austerity works when implemented well. But they remain the only working example right now, with most countries contracting badly from austerity measures, with Spain still not expected to exit recession this year. On the other hand, some countries have turned to stimulating their economy instead, banking that the resulting uplift in the economy will outweigh the debt added and help pay it off in the long run. For example Japan have recently announced a stimulus package equivalent to $116 billion, to try and lift the economy out of recession by spending government money on improving the country’s infrastructure; which provides jobs and also attracts businesses to the country. Critics suggest the money won’t be spent efficiently, while the stimulus package will only add to Japan’s considerable debt, already at 200% of GDP. But they aren’t the only country that have thought to spend their way out of their debts, with China and Brazil both launching stimulus packages last year to help reignite their economies after falling world demand for their exports. Maybe the best example to use is the USA, who largely ignored their considerable debt during Barack Obama’s first term (actually adding trillions of dollars onto it) but are now being forced to consider austerity. The looming fiscal cliff at the start of the year would have forced through considerable cuts in America budgets equal to 5% of their GDP, instead Obama and Congress were able to come to a short term solution to avoid such measures. But the debt ceiling must be re-negotiated soon and the long term problem of America’s rising medical costs must be dealt with sooner or later. This means America will be looking to implement austerity measures to help deal with their rising debt this year, probably with a mixture of spending cuts and tax increases if the democrats and republicans can ever agree. So if a conclusion is to be reached this year over Austerity or Stimulus in the battle to control countries debts, then America may be the deciding vote. If austerity can help America bring down its budget deficit and public debt, without tipping the economy into recession, then it might just snatch the win.

More talks like these are to be expected as America looks to battle its debts by enforcing austerity measures.

2012 was an eventful year, containing the Olympics, the election Mr Hollande as France’s first Socialist President in decades, the election of Mr Morsi in Egypt as the Muslim Brotherhood’s first big win in an election, the re-election of Mr Obama in the USA and the first example of a private firm venturing into space in the form of SpaceX. 2013 will have a lot to live up to, but if these trends prove correct, then it could prove just as eventful (hopefully minus an apocalypse this year).

For the last presidential debate in America, the subject was focused on Foreign Policy. Though if you consider all the foreign issues America has to deal with, it was a shame that the questions were fully focused upon just the Middle East and China. Iraq was mentioned, Iran was debated, Afghanistan was agreed on, Iran was debated some more, Syria received some sympathy, China was criticised and Libya was touched upon in parts (though Libya had already been discussed somewhat in the last debate). The Euro crisis didn’t even get a sound bite despite having a large impact on the future of the American economy, the troubles in Africa and South America were hardly mentioned (though at least Mali’s troubles with an Al Qaeda based group taking over half their country were referred to) while the futures of possible danger countries like North Korea, Russia and China were largely ignored.

A touchy subject is avoided.

This didn’t come as a major surprise really, the debate was always going to be focused upon the latest media stories and the candidates can only answer the questions put in front of them (though they rarely stayed on subject anyway). But some more varied debate could have seen the American public learn more about how each candidate plans to lead America in the future.

Getting back to the debate, it seemed to end in a draw with some positives for each candidate, though both remained expectedly cautious. Barack Obama perhaps got in some “zingers”, like when he caught Mitt Romney out on his criticism of America’s decline in the size of the navy by pointing out America also had less horses and Bayonets and that their current navy was measured more on their capabilities than number of boats. But how did each candidate do respectively?

Starting with Barack Obama, he managed to perform a good debate; avoiding mistakes (a consistency he manages well), appearing experienced in his Commander-in-Chief role and providing a clear answer to the big Iran question. But it wasn’t all rosy, as he didn’t manage to catch out Mitt Romney on any major issues and surprisingly managed to become too aggressive at times (at stark contrast to his timid first debate). He did state clearly that he wouldn’t allow a nuclear Iran during his next term in office, would back Israel if attacked and would pull out soldiers from Afghanistan in 2014. But he was less clear on how he planned to stop President Assad from slaughtering his own people and didn’t offer any detail on how he was going to prevent Iran from gaining Nuclear weapons without using military intervention (with economic sanctions yet to have the required effect). He managed some cheap shot at Mr Romney’s past connections with Chinese companies stealing American jobs and at Mr Romney’s lack of experience in foreign policy. But when you consider this was Mitt Romney’s weakest area of debate, that Barack Obama had the killing of Osama Bin Laden to parade about and had 4 years of experience as Commander-in-Chief, then it was disappointing he didn’t win by a more convincing amount like Mitt Romney had managed in the economic debate.

The chaos in Syria continues, with neither candidate having a clear solution.

Mitt Romney, as stated before, was facing his hardest debate. He doesn’t have any experience with the armed forces, chose a running mate with similar inexperience and has based his election campaign on America’s economy. So it was little surprise that he tried to bring the subject around to the economy when answering tough questions. He repeatedly suggested America was looking weak to the rest of the world because of its weakened economy and high debt, stating China didn’t respect America because of the amount of money America owed them. This wasn’t a bad argument, but his second point to try and suggest that Obama’s policies were appearing weak and apologetic, did not work quite as well. The argument lacked evidence when you consider Barack Obama had managed to play a hand in toppling Gadaffi (though he overstated America involvement) and had authorised the killing of Osama Bin Laden. Mitt Romney was persuasive though when he managed to direct the argument towards the economy, bringing up a good argument for investing more time with South America as their economy on the whole is as big as China’s and also again pointing out Barack Obama’s increase to the budget deficit. On other subjects Mitt Romney decided to stay conservative, vague and basically agree with Barack Obama, which may not have pumped up Republicans, but could have ensured undecided voters keep him in mind. In fact he managed to completely change his opinion on Afghanistan by agreeing that the troops should leave by 2014 (perhaps based on the heavy criticism Paul Ryan received in the vice presidential debate) and seemed reluctant to attack Barack Obama on the Libya fiasco (again maybe after the criticism he received in the previous debate). The only subject he mainly differed from Barack Obama was on China, where he surprisingly remained consistent in stating he would call them a currency manipulator. There could be drawbacks to this action, with some suggesting it could start a trade war, but again when confronted with this he managed to bring the argument back to economic terms and provide a convincing argument that the current trade deficit with China means it is in China’s favour to refrain from doing so.

Chart showing the trade deficit America has with China.

So what have these debates resulted in?

The first debate saw Mitt Romney gain a big turnaround in the poles. His performance was good, but the real cause of the boost was the lack of confidence displayed by Barack Obama and the lowly position Mitt Romney had previously held (giving him an almost underdog status). Such low expectations meant that his good performance was perceived as a great one, with vice versa for Barack Obama. The second debate saw Barack Obama act more like his old self, challenging Mitt Romney on his tax numbers and goading him into some costly mistakes (like for example challenging Mr Obama’s word on how he described the killing of an American ambassador – resulting in Mr Romney looking petty). Barack Obama probably edged a victory, though again it was more in the context of his previously poor performance. That brought us to this final debate, where both candidates were rather cautious and nothing new was found out. It was probably a draw, with Barack Obama getting the more headline worthy lines, but Mitt Romney perhaps looking more attractive to the undecided voters than he had previously.

It’s hard to know the effect these debates will have on the actual election in two weeks time, though history suggests they can have a big effect, with Al Gore famously losing to George Bush after being outperformed in the election debates. But despite Mitt Romney probably doing better out of these recent debates (with his polls numbers decisively better off than before the first debate), Barack Obama is still just edging the race, which is how many had predicted the race to be previous to the debates, a tight and narrow win for Mr Obama.

Gallup found that after the first debate, Mitt Romney drew even with Barack Obama in the polls.

So while each debate was entertaining, I suspect not many have actually changed their mind on who they are going to vote for (if at all). Mitt Romney promises a better economy based on his vast experience in the private sector, but remains frustratingly vague on his budget plan and flips flops between policies. While Barack Obama promises more clear policies but continually has to defend a poor economic record during his first term. I believe Obama will win as his main weakness can still be blamed on the previous president and his policies, but he will have a lot to prove in his next term if he is to leave the White House with a respectable legacy.

With the Olympics coming to an end, I thought it would be in the spirit of the times to award some medals to countries based on their economic performances in 2012. With it only halfway through the year, some figures will be based on predictions for the year 2012. I will also only include modern economies, thereby discounting a lot of African countries that are heavily reliant on aid and countries in the middle east that still recovering from civil or foreign war. A trend of Asian economies succeeding goes right through the different departments, while a few countries can count multiple medals.

First up is the big one, GDP Growth – the annual increase in the market value of everything a country produces. In bronze position is Thailand with a predicted 6% growth this year, after recovering from their worst floods in nearly 70 years in 2011. Just ahead of them in silver position is India with 6.6% growth, as the country continues to expand its economy to keep up with a burgeoning population. A recent mass power cut however showed the insecurities in their infrastructure, which could possibly hurt future growth for the country. Out in front is China with 8.1% growth predicted for the year, as the country strives to surpass the USA in the record books as top dog.

1st China – 2nd India – 3rd Thailand

Graph showing China’s growth over the years.

The next event is Unemployment, where the nations are competing on their ability to get people into work. After getting bronze in the last event, Thailand comfortably wins the gold here, with the percentage of the population unemployed at an extremely low rate of 0.9%. This is contested however with Thailand accused of not seasonally adjusting their numbers (as farmers are out of work for long periods). If that is proven correct then the current runner up, Singapore would be awarded gold, with unemployment at 2%. The government has achieved this by both having a very stringent benefits policy and by having a low population of just over 5 million. In the fight for the Bronze medal, Switzerland just beats off competition from Malaysia and Norway. With unemployment at 2.9%, Switzerland has done well by having strict visa rules which can be adjusted to help keep employment high.

1st Thailand – 2nd Singapore – 3rd Switzerland

Graph showing Thailand’s unemployment rate since 2010.

The third event is the Current Account Balance as a percentage of GDP. This is the balance between Imports and Exports, with the best countries exporting more than they are importing, therefore having a current account surplus. After narrowly missing out on a medal in unemployment, Norway capture Bronze with a current account surplus of 14.1% of GDP. This is thanks to their vast Oil and Natural Gas resources, with global prices increasing in recent times. Ahead of them in second place is once again Singapore, who boasts a strong current account surplus of 17.9% of GDP. This is because Singapore contains the busiest port in the world, allowing the country to become a global trade hub. Taking Gold in this event is Saudi Arabia; whose enormous oil reserves (the largest exporter of oil in the world) has allowed it to build up a current account surplus of 22.7% of GDP.

1st Saudi Arabia – 2nd Singapore – 3rd Norway

Graph showing the current account balance of Saudi Arabia

Following this is the National Budget Balancing event. In this the best countries are able to make money from tax revenues after taking away government expenditure, thereby producing a budget surplus. In Gold and Silver positions are Norway with a budget surplus of 14.3% of GDP and Saudi Arabia with a budget surplus of 11.1% of GDP. These two top the pile because of the same reason as their high current accounts, they have vast Oil and Natural Gas reserves. Unlike Singapore whose high current account came from their successful port, the exportation of raw materials has boosted Norway’s and Saudi Arabia’s budgets by observable amounts. In a far off bronze position is Chile, who government has worked well to possess a budget surplus of 1.5%. This is partly down to the efficient running of the country by the government but is also down to a rise in the copper prices, of which the Chilean economy is highly sensitive towards.

1st Norway – 2nd Saudi Arabia – 3rd Chile

Graph showing Norway’s superiority over the rest of Europe with its high budget surplus.

Finally, to finish off the medal ceremony is the government’s 10 year bond yields. These are the interest rates that each government must pay to loan money on the international markets, where the lower the number is, the more secure international creditors believe you are. For example Spain is currently facing very high interest rates, while the likes of Greece are not even able to borrow money on the international markets (leaving them reliant of bail outs). In Bronze position, Japan is able to borrow very cheaply in the long run with interest rates at 0.81%. These figures are somewhat distorted though as the government puts pressure on Japanese banks to buy their bonds, helping to drive down the bond yield rates. In silver position, Hong Kong boasts an even cheaper rate of 0.74% on long term loans. With a AAA credit status and heavy links to China (where heavy capital controls restrict international investment) the city state has become very popular in the bond markets as a secure investment. But in Gold position and winner of the event is Switzerland with interest rates of 0.63% on long term bonds. Switzerland are treated to such low interest rates namely because of the euro crisis, as the countries surrounding Switzerland face the ever present danger of a euro collapse. Switzerland (not in the EU) is therefore seen as a safe haven in a sea of chaos called Europe.

1st Switzerland – 2nd Hong Kong – 3rd Japan

Table showing the worlds lowest bond yields on the 1st June 2012. Since then Hong Kong has overtaken Denmark and Japan into second place

Australia has yet to set the world alight in the Olympics so far, but in economic terms they remain a model to follow for other nations. The IMF has predicted they will be the best performing advanced economy over the next two years; with GDP growth forecasts for 2012 estimated at 3.3%, unemployment currently low at 5.2% and a low budget deficit of 0.7% (Britain’s deficit is 8.2% in comparison). In GDP per capita terms, Australia is ranked fifth in the world, higher than both Germany and Britain. In the UN’s Human Development Index (a measurement of the standard of living) Australia ranked second last year, in fact Australia had eight times as many adults earning over $100,000 than the World-wide average. On top of this the nation’s Public Debt to GDP ratio is currently 24%, the lowest among the OECD countries.

The left table shows Australia in second place in the UN’s Human Development Index.

So how is Australia doing so well in such difficult times?

One major reason is the mining boom the country is currently experiencing. Australia is rich in mineral wealth and has a large mining industry that is pushing the economy forward. Australia’s close proximity to China has seen the two countries develop a good relationship, where China’s unprecedented demand for raw materials helped fuel the mining boom. This and the combination of high commodity prices helped Australia weather the financial crisis and keep unemployment low. Australia has now become the leading producers of minerals in the world, with mineral exports accounting for half of all of Australia’s exports. The mining sector also accounts for 9% of Australia’s GDP (roughly the same as manufacturing) and from 2006 to 2011 the value of mining exports more than doubled. The fear is that China’s recent signs of slowing down could have an impact on the future of Australia’s mining industry, which would certainly slow down the strong growth that the country has been experiencing. The sharp fall in commodity prices won’t help either, so Australia might have to work on diversifying their economy more to help lower the impact of a decline in the mining industry.

This graph shows the big increase in exports of Iron and Coal, as Australia experienced a mining boom.

Another factor is the strength of the Australian currency. The Australian dollar has grown in value since the financial crisis and has seen the country become a haven for investors. With the EU set to implode and the USA facing a fiscal cliff at the end of the year, Australia remains one of the only AAA credit countries with a stable future outlook from all three of the top credit agencies. They offer secure government bonds with high yields; a ten year Australian bond yields 3.05% compared to Britain’s (another AAA credit nation) ten year bonds which only yield 1.48%. This is seeing more and more cash running through Australia and investors putting their money into Australian assets. The decline in commodity prices could weaken the Australian dollar, but even then that would give a timely boost to Australian exports, as foreign companies would be able to buy Australian goods for cheaper.

The Economist’s index based on the prices of McDonald Big macs over different countries shows Australia’s currency has increased in value by 22%.

Another factor in Australia’s success has been in attracting talent to the country. Since 2007 Australia has slowed down the total number of visa’s it offers, but importantly has increased the number offered to skilled workers by 23,000. Australia now offers nearly as many visas to skilled workers as the USA despite having a much smaller population (22.5 million compared to 311.6 million). This has meant an influx of talented, useful immigrants have come into the country and improved Australia’s productivity and employment figures.

But there are hidden problems. Australia has been criticised as a two speed economy, where sectors that aren’t linked to the mining boom are said to be in very slow speed or could even be going backwards. There is evidence supporting this idea, with Fairfax (a media company) announcing 1,900 job cuts and Hastie Group going into administration losing the country 2,000 jobs, while starts of new building constructions fell by 11% in 2011. Another problem is the Labour government currently in power, headed by Prime Minister Julia Gillard. They are deeply unpopular after releasing a new carbon tax on the public, despite it having good intentions and the fact that Australia is one of the least taxed advanced economies. The parties polls show that just one in four Australians are prepared to vote them back in at the next elections. This leaves companies wary of any promises being made by the current government, as the rival parties seem sure to reverse some key polices like the aforementioned carbon tax. Finally, the country also has a problem with its current account (imports and exports); publishing a deficit of 3.5%. This has long been a problem for Australia, as they lack a successful export orientated manufacturing industry. Improvements in this area could prove a big step to diversifying their economy away from the dependence on a mining boom.

This graph shows the current account deficit problem that Australia have had to deal with for a while now.

But despite the potential problems they face, the country stands in a great position – they are the envy of America and a pipe dream for Europe. If this was the Olympics we were talking about, Australia would be gold medallists by now.

The term BRIC’s represents four countries that have the potential to become the world’s next global powers: Brazil, Russia, India and China. Yet these nations are struggling to live up to their promise as they each face different problems with their economies.

Brazil is South America’s largest country and economy, as well as the 6th largest economy in the world. The nation has huge potential, with two future international events set to be staged in the country in the next 4 years, a thriving industrial sector, low unemployment and lots of FDI still pouring into Brazil. Above all they can boast a reliable democracy and good institutions that instil the rule of law, none of the other BRIC nations can match this. Yet Brazil is still on a worrying path. In 2010 Brazil grew by 7.5% to great applause from the rest of the world, but in the following year slumped to just 2.7%, well below the rest of the BRIC nations and Brazils high expectations of themselves. This year Brazil have forecasted growth of 4.5%, but external sources are much more pessimistic predicting just 3.5% a figure that is too low for a country like Brazil that needs high growth to keep up with the social costs of modernising its economy. So what are the reasons behind this slump in growth? For that there are many answers; the euro crisis and a strong currency slowing down demand for Brazilian exports, falling commodity prices (which help fuel Brazil’s economy), a complex tax system (that takes a higher percentage than any other middle income country) and their government. The last factor is a big reason for their slowdown in growth as the government continues to badly manage the country’s economy. Brazil remains a nation full of inequality, this is a problem the government has failed to solve for years now, as spending has been focused on financing government projects and an over generous pension system rather than reallocating funds to the poorer regions of the country. The government has also failed to invest in infrastructure with the transport system truly a mess, though the impending World Cup could help push the government into action. This leads on the next point that the government desperately needs to reform the economy to keep boosting growth, yet seems unwilling to make any big changes while the going is still good. The main reform that is needed is to free up their economy, protectionism is still a key policy of the government (especially in the oil industry) and it keeps inefficient Brazilian firms in business that should have gone under years ago. The best option could be to sign a free trade agreement with the rest of South America, which could in turn help boost Brazilian exports like the eurozone did for Germany. Without these reforms Brazil could face low growth for the next few years yet, undermining their status as one of the BRIC nations.

Brazil showed the lowest growth last year out of the BRIC nations.

Next is Russia, whose political corruption remains their biggest problem. Vladimir Putin recently swapped jobs with Dmitry Medvedev to once again become Russia’s president, allowing Medvedev to take up his old position of prime minister. This was greeted by mass protests on the streets, but to little effect as the Kremlin kept their control over Russia. The problem is Putin seems unwilling to reform the economy, while the corruption that is rife in Russia makes it an unlikely destination for businesses to conduct deals (ranking 143rd in the world for transparency and 120th for “ease of doing business”). Its BRIC standing creates the perception that Russia is still an emerging economy with lots of potential, but instead it has become an oil dependant nation that seems stuck in its ways. Inequality is also a big problem, where the country is split into the very rich and the very poor, with only recently a middle class looking to emerge. Still the ultra rich have too much of a say in how the country is run, with government policy dictated by how it can profit the monopolies in Russia’s markets. The city of Moscow has the largest proportion of Billionaires in the world, where conveniently power is heavily centralised, while 20% of GDP is supplied by the ultra rich in the country (again the highest percentage in the world). Putin has made some promises in changing the economy (like improving investment) but has failed to implement promised policies in the past and there are no signs that he has changed his ways. Despite this Russia still enjoyed 4.3% growth in 2011 and are projected to grow again this year by 3.6%, this will keep the market wolves at bay and as long as there aren’t any big oil crises then Russia should continue to improve. But if Russia is to really become a global power then they will need to diversify their economy away from oil and make their country more attractive to outside investment.

Russia with the second highest amount of Billionaires, beating the other BRIC members.

Then there is India, a country with huge resources at their disposal (huge population, lots of natural resources) yet one that is not quite achieving their potential. The economy of India is still growing at levels that Europeans could only dream of, with the average growth level since 2000 being 7.4%, but this is mainly down to the radical economic reforms that India made in the 1990’s, which freed up its economy. Similar reforms are now needed again to keep up growth, but the current government seems reluctant to act. The problem is that India now has a worse current account deficit and worse debt level than they did back then, meaning if anything reforms are even more vital. The country needs to attract investment into its country first and foremost, with a recent controversial “retroactive tax” policy causing more harm than good with a damaging fight with Vodafone over the tax that the firm is suggested to owe the Indian government from the acquisition of Hutchinson’s Indian business in 2007. The tax bill came in total to $3.75 billion and has only deepened the worry that foreigners have in investing in the country, though Vodafone have confirmed they will continue an $18.6 billion investment into the country. The country relies on good FDI (foreign direct investment) to finances its current account deficit at around 4% of GDP (the country exports more than it imports), so good relations with investors are a must. There is also too much regulation over foreign investment and too much intervention into the countries markets by the government. The power production industry is still largely state run, while the telecoms, insurance and retail markets are made extremely hard to enter for foreign firms (through a mix of corruption and regulation). Add to this the fact that Western investors are now much more reluctant to throw money around and India is facing a big problem attracting investment, on which its economy is run on. For a country with one of the best manufacturing sectors and a big potential service market (with over a billion people in the country), attracting FDI should not be a problem, yet the government’s antics have made companies question such decisions. The expensive subsidies that India pays to help its local companies cost them around 2.4% of GDP, increasing an already high budget deficit of near 6% and high inflation at near 7% which show the country’s economy is potentially overheating, as it relies too heavily on foreign capital. That isn’t to say progress hasn’t been made, with 52 million people being lifted out of poverty in the last 5 years, but the fact that half of all Indians still have to defecate in the open shows there are still major problems with the country. For India high growth of at least 6% is necessary to support their burgeoning population (of which a third still live below the poverty line) and pay off their high debts, while only a rise in wages and a major improvement in the country’s infrastructure will allow India to finally achieve their status as a new world power.

India has the highest budget deficit and highest public debt to GDP ratio compared to the other BRIC members

China completes the list, with the world’s second largest economy and is widely predicted to overtake the USA in the near future to take the top spot. Yet China faces similar issue to India, with its economy slowing down and its people reliant on high growth. China’s predicted growth this year is 8.2%, a world high still but actually China’s weakest expansion in 13 years. Like India, China needs high growth to support its huge population and keep the economy running, with 8% probably the minimum requirement. The country experienced a fast decline in industrial production, construction and electricity output in the last year which has lead many critics to suggest the economy is overheating. But China’s economy is surprisingly unreliant on foreign capital and is actually financed heavily by the state, which has the nasty habit of creating barriers to entry for foreign firms but does help make China more resilient than India and less dependent on private confidence. This investment by the state into the country’s infrastructure and factories is what boosts growth more than its exports, as it counted for 48% of GDP last year. China also the capital to re-finance any banks that might go under (a serious problem in Europe) and is one of the few countries not facing a liquidity problem. China’s general population is also much older than India’s, meaning the high growth needed to supply such a hefty workforce may no longer be needed in the future. Out of all the BRIC countries China is undoubtedly the strongest and can already call itself a world power, but the country does face some issues in the future. China will have to free up its economy sooner or later to foreign investment or risk inefficient national firms wasting the countries resources, while inequality between the countries inner and outer regions is high, something the government will have to try and fix in the long term. China also has competitors in its industrial sector; as once the cheapest option for foreign firms, countries like Vietnam can now boast cheaper costs, making China less attractive. This could be a factor in China’s current account surplus, once as high as 10% in 2007, dropping to 2.8% of GDP this year, though the main reason is probably the increased investment by the state as mentioned earlier. This is still a good surplus and in fact many countries felt China wasn’t spending enough anyway and was manipulating their currency to keep it low, but it could prove a problem if investment isn’t sustainable as many economists believe. China’s big problem is that their population is still incredibly poor for such a big economy (China ranks 90th in the world for income per person) and the investment that causes such high growth is not a long term option, meaning China will have to free up its services and financial markets if it to continue high growth and increase the income of its population to the standing that its economy now holds.

China’s current account surplus drops from 10% to 2.6% in the last 5 years.

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Kane Prior

My name is Kane Prior and I like to write about economic issues from around the World. I am a graduate from the University of Kent with a 2.1 degree in Business and Economics. I hope to use this blog to gain interest in myself and maybe lead to some potential career someday. If you want to contact me I am on Twitter (just click on the image) and if you have any writing opportunities for me, then please feel free to drop a message.

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